Australian Business Expectations Survey: Business Confidence is solid, but where are the jobs?

7 February 2017

BUSINESS CONFIDENCE IS SOLID, BUT WHERE ARE THE JOBS?

Employment expectations for the June quarter of 2017 are at a more than three-year low. In Dun & Bradstreet’s January Business Expectations Survey, businesses indicated that they would slow hiring in the quarter ahead, despite increased expectations for sales, profits and capital investment. Meanwhile, companies reported higher sales in the December quarter, but lower employment levels, selling prices, profits and capital investment.

According to Stephen Koukoulas, economics adviser to Dun and Bradstreet: "Business expectations through to the middle of 2017 are mixed, and have taken a step down from the optimism seen at the end of 2016. Encouragingly, expected sales continue to rise at a solid pace, which points to ongoing expansion in activity into 2017.

"Of note also is the steady rise in expected capital expenditure, which is an encouraging aspect of the survey given how weak the official business investment data have been for the last few years," Mr Koukoulas said.

Dun & Bradstreet’s Business Expectations Index, the average of the survey’s measures of Sales, Profits, Employment and Capital Investment, climbed to 19.5 points for the June quarter of 2017, up 3.2 percent from 18.9 points for the March quarter 2017 and up 53.5 percent from the June quarter 2016 figure. The preliminary Q2 2017 result is 10.1 points above the 10-year average of 9.1 points. The index is currently at its highest point since the December quarter of 2015, when it reached 21.8 points.

"After a minor lift, expected selling prices are moderating, which indicates that inflation will remain very low through to at least the middle of 2017. The Selling Prices Expectations Index has a good record for matching broad changes in the official CPI data," Mr Koukoulas noted.

The Sales Expectations Index jumped to 36.4 points in the June quarter, up from 28.1 points in the March quarter and 23.6 points in the previous corresponding quarter. For the June quarter of 2017, 44.8 percent of businesses expect to see an increase in sales compared to the June quarter of 2016, while 8.4 percent expected a decrease in sales. Expectations for sales increased quarter-on-quarter for all surveyed industries except Retail; and expectations for sales increased year-on-year for all industries except Finances, Insurance & Real Estate.

Plans for capital investment continue to increase: 19.4 percent of companies say they will increase capital spending in June 2017 compared to June 2016, while 5.9 percent say they will lower their capital expenditure. The Capital Investment Index now sits at 13.5 points, up from 11.8 points in the March quarter and 8.7 points for the June quarter of 2016.

Expectations for profit in the June quarter are largely on par with the March quarter, with the Profit Expectations Index moving from 21.0 points to 21.5 points. However, compared to the June quarter of 2016, businesses are notably more optimistic regarding profits: the index has jumped 110.5 percent from 10.2 points.

Despite the apparent confidence regarding sales, profits and capital investment, the Employment Expectations Index slipped to its lowest point since the December quarter of 2013. The index fell to 6.7 points for the June quarter, compared to 14.6 points in the March quarter and 8.3 points in the previous corresponding quarter. For the coming quarter, 16.5 percent of businesses say they intend to employ more staff than a year ago, while 9.9 percent expect to employ fewer.

"Of some concern is the pull-back in expectations for employment, which has dipped to its lowest level in over three years. This indicator fits well with the official labour force data which continues to show a sluggish pace of employment growth and a minor lift in the unemployment rate," Mr Koukoulas said.

Of the seven industries surveyed, only the Wholesale and Construction industries had a higher Employment Expectations Index for the June quarter compared to the March quarter. The Retail industry saw a particularly sharp decline in employment expectations, with the index dropping from 11.3 points in the first quarter to -3.5 points in the second quarter.

In general, Retailers expressed a muted outlook for the second quarter. Expectations for sales, employment, profits and selling prices were lower than the previous quarter. However, compared to the same time a year earlier, the Sales Expectations Index and Profit Expectations Index were higher. Furthermore, plans for capital expenditure were up in the Retail sector, with the index lifting to 9.2 points, up from 4.7 points in the March quarter and 9.1 points in the previous corresponding quarter.

The Services sector also saw quarterly declines in four out of five components: its Employment, Selling Prices, Profit and Capital Investment Expectations Indices were down, but its Sales Expectations Index rose to a two-year high of 39.3 points. The Services sector’s lowered expectations for the quarter ahead are reflected in its response to the question “Are you generally more optimistic about business growth this year compared to 2016?” Just 50 percent of Services companies said they were more optimistic (the lowest positive response of all seven sectors) while 32.1 percent said they were not (the highest negative response of all seven sectors).

By comparison, the Wholesale industry had the highest positive response to the same question (75.9 percent are more optimistic) and the lowest negative response (13.8 percent are less optimistic). This also reflects the sector’s broader survey results. Its Sales Expectations Index (50.4 points) is at its highest point since Q2 2000; its Profit Expectations Index (29.1 points) is at its highest point since Q1 2013; its Employee Expectations Index (18.2 points) is at its highest point since Q4 2003, as is its overall Business Expectations Index (28.1 points).

Meanwhile, after returning the lowest Business Expectations Index of all sectors in Q1 2017, the Construction industry bounced back for the second quarter: its Business Expectations Index rose from 5.9 points to 23.4 points, driven by increased expectations across all components. Most notably, its Sales Expectations Index leapt from 9.8 points to 39.0 points.

Bucking the national trend, Construction’s employment expectations also saw a sharp increase from 5.8 points in Q1 to 18.3 points in Q2. Some 23.4 percent of Construction companies said they would hire more staff in Q2 2017 than in Q2 2016, while 5.0 percent said they would employ fewer. However, Construction firms also flagged "Access to or a shortage of skilled labour" as the biggest barrier to business growth in the year ahead.

Across all sectors, actual employment numbers were down in the December quarter 2016 compared to the September quarter: the Employment Actuals Index slid from 4.8 points to 0.5 points – its lowest since the September quarter of 2013. Q4 2016 also saw lower selling prices (8.7 points, down from 10.3 points in Q3), profits (6.8 points, down from 8.3 points) and capital investment (5.8 points, down from 9.1 points). Only the Sales Actuals Index rose in Q4 2016, jumping from 12.8 points to 18.0 points. All industries except Services saw an increase in Sales in Q4 2016 compared to Q3 (7.8 points, down from 14.2 points).

By and large, businesses do not expect to be impacted by the result of November’s US federal election. Some 63.8 percent of all businesses said the outcome will not affect their operations. 9.8 percent expect a positive outcome, compared to the 8.6 percent who expect a negative impact. The remaining 17.9 percent are unsure. In general, medium-sized companies are more optimistic on this matter than small companies.

Businesses based in the Northern Territory were the least optimistic overall about Donald Trump’s election: 13.6 percent of companies said they expect a negative impact, and no companies expect a positive impact. South Australian companies were the most optimistic overall, with 15.2 percent anticipating a positive outcome, compared to the 3.0 percent who expect a negative outcome. Similarly, 12.1 percent of Tasmania-based businesses expect a positive outcome, while none expect a negative outcome. Businesses feeling optimistic are most likely to be from Western Australia (27.5 percent), while businesses anticipating a negative impact are more likely to be from Victoria (28.6 percent).

"Overall, the Business Expectations Survey points to the economy continuing to grow at a moderate pace, with a generally soft tone for job creation. Inflation is expected to stay low which should influence the Reserve Bank to keep interest rates at record lows," Mr Koukoulas concluded.

Established in 1887, Dun & Bradstreet is Australia and New Zealand's longest-established credit information bureau. Backed by its extensive database, Dun & Bradstreet helps businesses to make informed credit decisions, and consumers to access personal credit information. Dun & Bradstreet works across the entire credit lifecycle to deliver data-driven solutions in sales and marketing, credit reporting and debt management. Through analysis of financial and behavioural information, Dun & Bradstreet also provides current and predictive assessments of the economy, business conditions and credit activity.